Technology is key amid a volatile market, regulatory and accounting changes: Clearwater’s Wenzhe Sheng

As Clearwater Analytics works towards revolutionising the world of investing, we spoke with Senior Product Manager for EMEA Prudential Regulations, Wenzhe Sheng, about regulatory and technology trends in the insurance industry amid a volatile investment market environment.

Founded in 2004, Clearwater Analytics is a SaaS, full lifecycle investment management solution which aims to provide trusted investment data aggregation, reconciliation, accounting, and reporting.

With insurers and reinsurers in the European Union (EU) and the UK navigating operational, regulatory, and accounting adjustments in light of Solvency II, IFRS 17 and so on, Sheng emphasised the ensuing regulatory change process as a key focus.

Take Solvency II, the new regulatory reform set to take effect this year in the UK, it requires insurers to provide more detailed reporting, risk disclosures, and data granularity. It’s a complex transition for insurers and the current guidance isn’t the final version, so there will be more to come.

“Regulations are never going to get easy,” said Sheng.

As well as continuous regulatory changes, Sheng highlighted the system and operating model perspective, in particular the fact that many insurers still have legacy systems. Knowing this, regulators are starting to lean in on operational readiness, resilience, and risk.

“It’s about how we can move away from the old technology to the modern world with things like the Cloud, artificial intelligence (AI) and so on. This is one of the hot topics,” said Sheng.

Another part of the equation is accounting standards, such as IFRS 9 and IFRS 17, which trigger large operational and system changes, with costs being shouldered by the industry.

IFRS 17 came into effective on January 1st, 2023, and requires companies to measure insurance contracts using updated estimates and assumptions. It is less relevant to what Clearwater does, explained Sheng, but has a huge significance to insurance companies which operate in other IFRS frameworks.

“Primarily, the Contractual Service Margin (CSM), the amortised profit concept being introduced as part of IFRS 17, focuses on profitability as well as capital to the investor who is interested in those companies,” said Sheng.

In contrast, IFRS 9 focuses mostly on the fair value of financial instruments, and although it was brought into the insurance realm a few years ago, Sheng feels that many carriers are still struggling with it, “primarily because they don’t have a really good credit risk model, and they don’t know how to calculate the methodology in those areas.”

“So, there’s a lot of challenges in terms of implementing new regulatory and accounting changes,” said Sheng.

One of the ways these challenges can be overcome is through new technology. Clearwater is one of the companies focused on technology that provides insurers and asset managers an operating model for now and into the future. Committed to providing a single instance, multi-tenant, centralised solution to streamline investment data aggregation and reporting processes, Clearwater prides itself on keeping up to date with regulatory change as part of the bigger picture.

In addition to regulatory tech advancements, Sheng underlined tokenisation, data innovation, and AI as key topics.

“The thing with technology is that it’s built based on data and the data can sometimes be ambiguous, so tokenisation is a leap forward to think about how we can standardise across the industry,” said Sheng.

Tokenisation, the process of creating a digital version of something real, can be leveraged to protect sensitive data but also to efficiently process large amounts of data, potentially enabling a more streamlined approach to claims management and provide insurers with better access to data.

In terms of AI, Sheng noted that the current sentiment is that this technology is unstoppable because that is the direction we are going in.

“However, there is a lot of thinking around how we can ensure AI is a good use for us and limit its bad use cases,” said Sheng.

For insurers, all of these regulatory and accounting changes and technological advancements are happening in a volatile market environment characterised by unsettled inflation and interest rates, which can hinder investment appetite for new technology.

Sheng emphasised that this environment isn’t ideal for the stability of the insurance industry, and with profits being squeezed, it’s also far from ideal for investors.

“However, I think the expectation is that in the first half of this year inflation is going to stabilise, at least that is the common consensus among the market, and in H2, the expectation is there will be some rates cut to try to stimulate a market recovery.

“It’s a good time for companies to think about how they can reinvest in their infrastructure and technology to make sure their cost base in the future can be well maintained. That way they can ensure their profitability is as high as possible for their investors,” said Sheng.

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